The Art of Due Diligence – Part 1

This is the first of three blogs that will give you, the business owner looking to sell your company, an insight into the art of due diligence and its important in the M&A process.

Due diligence is defined as the investigation, research and analysis of a business or person undertaken prior to signing a contract. It also means the care a reasonable person takes to avoid harm to him/ herself or other people. The primary purpose of due diligence is to assist in making an informed decision.

Start Early, prepare fully and work smart

According to the Economist, between 10 and 20% of proposed mergers and acquisitions “end in tears…” and conventional wisdom also maintains that M&A events fail to deliver on their anticipated value an astonishing 50% or more of the time.

Deals can go wrong for many reasons, but at the heart of the matter is typically a false assumption that ultimately played itself out to a bad end.

When this happens, the media is quick to pounce and investors and shareholders swiftly voice their disapproval about decisions that failed to provide the promised value. A company will even face public backlash long after an ill-fated deal has been relegated to the dustbin.

So, how do companies stack the odds in their favour for a successful M&A transaction?

To effectively position a company for a successful M&A event, two key tenets are preparation and strategy. For companies contemplating a sale, whether of an entire business or partial divesture, best practice suggests that preparations should begin as much as 18 months in advance of the anticipated M&A event.

Although preparing for a sale a year and a half in advance may seem excessive, it can actually be key in positioning a company to attract the highest number of qualified partners. This, in turn, elevates the chances for a successful sale and positive post-sale integration.

In practice, advanced preparation on the sale-side increases the chances a buy-side investor can be able to quickly elevate and act on an opportunity. Evidence shows deals that drag on are often those that ultimately fail. A business that has devoted the time and energy to position itself attractively for the marketplace helps speed up the due diligence process and reduced the odds of a negative outcome.

Advance preparation also increases a selling company’s ability to negotiate excellent terms and price, because buyers will be able to effectively review, analyse and vet all critical business metrics. Once a buyer has done that and is confident the seller is a good partner, an acquirer is more likely to look favourably on the selling company’s desired price and terms.

In fact, careful internal pre-deal planning, analysis and screening allows companies to find and address any potential snags or stumbling blocks long before they are uncovered by potential buyers, smoothing the path of the deal.

In the second blog we will discuss how to prepare a business for M&A pre-deal… stay tuned.